Which financial concept refers to the capacity of a business to cover its immediate liabilities?

Liquidity refers to the ability of a business to meet its short-term financial obligations or immediate liabilities. It reflects how quickly assets can be converted into cash or how readily available cash is to pay off debts that are due in the near term. This concept is critical in assessing a company's financial health, as it indicates whether the company can sustain its operations without facing financial distress.

For instance, if a business has high liquidity, it can easily pay off bills, salaries, and other short-term liabilities, ensuring smooth operational continuity. In contrast, if liquidity is low, it may result in difficulties meeting obligations, which can lead to negative implications such as damaged creditworthiness or potential bankruptcy.

This understanding sets liquidity apart from the other concepts. Leverage relates to the use of borrowed funds to amplify potential returns, cash flow pertains to the amount of cash generated or consumed by business operations over a specific period, and the current ratio is a specific financial metric used to assess liquidity, but does not encompass the broader definition directly.